Since healthcare is one of the most expensive cost items that individuals face in retirement it is important to be aware of these costs and to be able to project them with a high degree of certainty. Retirement studies have shown that healthcare costs are approximately 33% of all expenditures of individuals over the age of 60. These healthcare costs vary with respect to the state in which one will live in retirement, the individual's expected income level and other factors that are related to the individual. It is therefore important during the prediction of how to allocate resources in retirement that one does not just rely on a verbal survey to calculate what is required in retirement but rather than picking an arbitrary healthcare cost number there is a necessity for establishing healthcare cost numbers that more accurately reflect what will happen to the particular individual in retirement based on age, gender, health conditions, expected state of residence and income since Medicare is means tested.
As will be seen the subject invention relies on actual claims data and actual costs for resolving these claims upon which and healthcare costs as projected. This means that projections are based on actual claims data, meaning data that reflects actual claims and data that reflects the actual cost of resolving the claims.
It is noted that there are many companies in the United States that attempt to project health costs by conducting surveys with consumers, asking their opinions about what they plan to do in retirement while taking into account their own personal healthcare expenses.
The companies which conduct these surveys utilize sample sizes on the order of 1,000 to 2,000 people and they are almost instantaneously out-of-date because the information is pertinent to the specific period of time at which it was collected. The result historically is that the information regarding retirement planning from companies in the healthcare space are based on this survey-based data.
Typically in these surveys a sample of individuals are surveyed who typically are people who will be retiring in the next 5 to 10 years. Financial planning institutions collect the attitudes of the surveyed individuals in order to form the foundation from which the institution can project costs. It is noted that these surveys are based on what individuals perceive and are not based on anything having to do with actual behavior or actual costs. Typically the surveys are conducted on-line with a random set of on-line individuals, typically over the age of 55. The individuals are asked a set of questions, with the answers collected and published to be able to project healthcare cost estimates or averages from the survey-based information.
There is another survey-based population in which surveys are conducted by the Center for Disease Control (CDC). These surveys have survey populations based on groups of people having particular chronic diseases such as cancer or cardiovascular disease. The data available from the CDC is a combination of observations based on health conditions appended to the reported attitudes of the people surveyed. The data from the CDC is valuable because the CDC knows about the various chronic conditions so that the CDC can make generalizations about the attitudes and behaviors of selected populations.
From the point of view of a statistician and a notion of valid sample sizes, when one wishes to give financial advice to an individual regarding his or her healthcare cost and try to project into the future what the individual's healthcare costs will be it is absolutely imperative that one has a valid sample size that reflects the individual's profile. Thus, for example, for a man who is age 50 and has type II diabetes and who plans to live in Florida in his retirement, when one tries to assemble data related to these combinations together with the relevant populations for each of these profiles the available sample size is miniscule.
Thus, in order to validate the outcome for that individual given the combinations in his or her profile one needs to have a valid cell behind the projections of actual behavior. No such cell currently exists.
In the United States there is currently one independent calculation of actuarial data in which claims data is collected across all of the health insurers. That data of for instance involves 50 million records per year to populate a very extensive database from which one can derive algorithms to actuarially project healthcare costs that are statistically reliable for an individual for a wide number of these combinations of circumstances. If one could obtain claims data and the real cost of resolving these claims one could form a very solid and accurate, precise estimate of what the individual's healthcare costs will be on an annual basis.
Thus, in the past what surveys exist are based on 1,000 to 4,000 people per year and one cannot analyze that population down to the finite level required for statistically reliable healthcare data for an individual.
One healthcare related financial management tool for which accurate healthcare cost data is required is described in U.S. patent application Ser. No. 12/655,591 filed Jan. 4, 2010, incorporated herein by reference. It is to this financial tool that it is critically important to bring statistically accurate and viable healthcare costs and statistics.
Up to the present time there has been no complete database for financial healthcare tools that are statistically robust enough to provide meaningful financial advice, primarily because what tools that do exist do not incorporate actual claims data and actual costs of resolving these claims.
By way of further background, financial services available from a large number of companies include comprehensive planning tools that aid individuals in planning for retirement. These comprehensive planning tools such as those available from Zywave's Naviplan provide an individual with ways of planning for the individual's retirement based on the individual's personal financial profile. Typically these comprehensive planning tools take into account contributing factors, such as fixed and variable living expenses such as mortgage, food, utilities, clothing, vacation expenses, charity donations, and taxes. Typically these tools specify a retirement date and project available funds by taking into account various income sources as well as expenses throughout the retirement period.
These comprehensive tools may factor in retirement income generated from sources such as savings, Social Security, a pension, veterans benefits as well as employment during retirement.
All of these comprehensive tools project available cash or income while making adjustments for variables such as inflation and the rate of return, allowing an investment counselor to determine the financial status of their client
The problem with such comprehensive planning tools is that they fail to take into account out of pocket health care costs and actuarially based expected longevity derived from a personal health profile for each individual. Up until the present time, there has been no way of calculating an investors future out of pocket health care costs based on a customized personal medical profile and expected lifespan. As medical expenses will be the single largest expense Americans will face in retirement, it is critically important that financial planners have an accurate and consistent means of incorporating health care expenses and life span into the retirement planning process. Moreover, traditional retirement planning tools do not incorporate longevity statistics based on the health of the individual.
It is noted above that the cost of heath care is the single largest financial burden faced in retirement. Over the last few decades health care costs have risen two to three times faster than inflation. Looking forward, the cost of medical care is projected to increase by as much as 15% annually. As a result, a 65 year old healthy female living to an actuarial calculated life expectancy of 89 will incur retirement healthcare expenses of $280,000 should she fall in the lowest income bracket to over $500,000 if she enters the highest income bracket.
In addition, the actual health care cost could even be higher if health care costs increase faster than projected. Moreover, if one becomes ill or one lives beyond the average life expectancy, one might need to be provided with nursing home care, where the average cost for a 65 year old female needing skilled nursing care in the State of Ohio can expect an average stay of approximately 3 years at a future cost of over $225,000 per year beginning at age 87.
With respect to commonly available insurance, it is noted that Medicare covers only half of health care expenses, and private insurance is often too costly and does not always address healthcare needs. These realities are causing forward looking consumers to assess the impact of health care expenses on their financial futures so that they can intelligently plan.
Thus, in the past there has not been a retirement planning tool that incorporates into individual plans personalized actuarial based longevity, as well as a calculation of health care expenses based on the health of the individual.
In order to overcome the shortcomings described above, the financial management tool described in the above noted patent application is provided which in addition to the usual financial profiling also considers an individual's health in order to project their heath care expenses during retirement. This tool also includes longevity calculations based on the personal health profile of each individual.
It is noted that financial advisors arbitrarily project lifespan and in many, if not the majority of cases, simply ignore health care expenses. As a result, there are health care expenses which are unaccounted for during the planning process that affects an individual's retirement.
Note this tool involves a method of calculating personal health care expenses and personalized longevity based on the particular medical history of the individual. This permits taking into account projected lifespan based on, amongst other things, health factors. Thus, if a person has high blood pressure or cancer; or is a smoker, the subject system projects a specific longevity as opposed to an average longevity. Moreover, these self-same considerations are utilized to project out annual health care costs during retirement. Additionally, the system accounts for accelerated healthcare expenses in the last two years of life which can create a substantial financial burden for extended family members.
With these two calculated inputs one can utilize the available comprehensive planning tools, and the subject system, to provide a comprehensive program tailored to the individual and not at the group level which is breaking new ground in the actuarial world.
In one embodiment, the system incorporates a questionnaire or profiling system that takes necessary items into account to calculate health care costs and longevity. This is then plugged into a database, in which the costs are broken down into different categories including Medicare Part A, Part B, Part D and Supplimental insurance premiums as well as other out of pocket expenses including co-pays eye, ear and dental expenses. The database for the individual is also broken down into specific disease states, such as heart disease, cancer, high blood pressure, cholesterol and the like. One embodiment of the system allows institutions to select from a 10 to 25 question health care questionnaire. This provides a report which calculates the projected amount of money that one will need to save in the present in order to cover future out of pocket health care expenses during retirement, all based on the individuals health history and expected lifespan. In one embodiment, the system takes the future value of retirement expenses as of the first year of retirement and based on an expected return on savings in retirement as well as the return on savings prior to retirement calculates how much the investor will be required to save today in order to cover future annual medical expenses in retirement. The system may output results in the net present value as well as future value.
Also inputted into the program is the current age of the individual, their proposed retirement age, their calculated life expectancy, the health care inflation rate, the expected rate of return prior to retirement, and the expected rate of return during retirement. The result of the financial tool calculation is the amount needed to be saved in order to cover future expenses, including health care costs.
The system is flexible in that one can choose a particular rate of return both prior to retirement and during retirement, and can then enter different retirement dates and to see the difference in the rates of return.
Obviously most individuals would not be as aggressive in their investments during retirement as they are in a pre-retirement period. This can also be reflected in the calculation made by the subject tool. As an example, if one is looking at a growth portfolio on a compounded basis, one may be looking at a 7% rate of return prior to retirement, but for instance a 4% return during retirement.
The important point is that the individual is given the opportunity to choose the rates of return and see what happens to the available funds. The calculation also enables one to project out what additional money needs to be saved per month if one cannot come up with an initial investment.
In summary, the above financial management tool permits an individual to know what are his or her costs going forward given a health-based prediction of how long the individual is expected to live.
This tool thus informs the individual of his options, calculates health care costs in his retirement planning, and gives him health-based longevity information that enables the individual to develop a comprehensive retirement plan.
The above the contrary not withstanding calculations have been based on survey date and a database that has a limited sample size.